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A key determinant of commodity price Co-movement: The role of daily market liquidity

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  • Zhang, Yongmin
  • Ding, Shusheng
  • Scheffel, Eric M.

Abstract

Daily price co-movement across different commodity classes and its key determinant are investigated in this paper. Using co-integration and Granger causality analysis, we identify a common liquidity factor which drives prices of five commodities (oil, silver, gold, corn, live cattle) to move along a common trend. When the market becomes more (less) liquid, all commodity prices tend to move up (down) in the same direction. As a result, such liquidity-driven price co-movement across different commodity classes is likely to generate aggregate price shocks and amplify inflation volatility. As a practical implication of our findings, policy makers ought to be able to draw valuable lessons from monitoring daily commodity liquidity dynamics as a timely bellwether for incipient inflation and to more effectively control inflation risk.

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  • Zhang, Yongmin & Ding, Shusheng & Scheffel, Eric M., 2019. "A key determinant of commodity price Co-movement: The role of daily market liquidity," Economic Modelling, Elsevier, vol. 81(C), pages 170-180.
    • Handle: RePEc:eee:ecmode:v:81:y:2019:i:c:p:170-180
    DOI: 10.1016/j.econmod.2019.01.004
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    More about this item

    Keywords

    Commodity price Co-Movement; Liquidity commonality; Granger test; Monetary policy;
    All these keywords.

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • F00 - International Economics - - General - - - General
    • G00 - Financial Economics - - General - - - General

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